Monday, January 26, 2015

The
European Central Bank’s (ECB) embrace of full-scale quantitative easing with
the purchase of government bonds was the main feature of global monetary policy
last week along with five rate cuts, including surprise cuts by Canada and Denmark.

Turkey and
Pakistan’s rate cuts were largely expected while Brazil’s rate rise was also expected. Armenia continued its tightening cycles in response to
the ongoing pressure on its dram currency due to the country’s close links with
Russia.

Through
the first five weeks of this year, the 90 central banks followed by Central
Bank News have cut their policy rates 11 times, or 44 percent of this year’s 25
policy decisions, a clear indication of central banks’ bias toward cutting
policy rates in the face of weakening global growth and falling inflation from
lower oil prices.

Meanwhile, four central banks have raised
rates this year – Belarus, Mongolia, Brazil and Armenia – amounting to 16
percent of this year’s policy decisions.

This
means that 60 percent of this year’s monetary policy decisions have resulted in
rate changes, showing how hyper-active central banks have been in adjusting
their policy to the main drivers of global monetary policy so far this year:
the ECB’s expanded stimulus, the crises in Russia, the pending policy
tightening by the Federal Reserve, sluggish global growth and falling
inflation.

In
comparison, 24.3 percent of the 482 policy decisions in 2014 resulted in rate
changes, with 13.5 percent of the decisions favoring rate cuts and 10.8 percent
favoring rate increases.

Nine of
the 65 rate cuts last year were taken by central banks in advanced economies
compared with 25 from emerging market central banks, 14 from frontier markets
and 17 from other central banks.

Four of
the 52 rate increases in 2014 came from advanced economies – New Zealand accounted
for all these rate hikes – while 24 rate rises were done by emerging market
central banks, five from frontier market central banks and 19 by central banks
in other markets.

Despite
the large number of rate cuts, the Global Monetary Policy Rate (GMPR) - the average
rate of the 90 central banks followed by Central Bank News – rose to 5.84
percent at the end of last week from 5.74 percent at the end of 2014.

This is partly due to a change in the
central banks included in the coverage - the Kyrgyz Republic has been included
while Samoa has been dropped – and the fact that central banks often raise
rates in larger increments than when they cut rates.

The 500 basis point rate rise by Belarus on
Jan. 8 is a case in point, with this rise larger than the combined rate cuts so
far this month by Bulgaria, Uzbekistan, Romania, India, Switzerland, Egypt,
Peru, Denmark, Canada and Pakistan.